Wednesday, June 14, 2017

Teaching Supply-side and Demand-side Economics

Just as macroeconomics and microeconomics are taught separately at most universities, so too should demand-side and supply-side economics be taught separately.  Demand-side and supply-side economics are fundamentally distinct and require a program of coursework designed to explore each method in full, absent conflicting arguments and theories.  Teaching the rudiments of each approach in one course is like teaching Spanish and French from the same textbook.  Without a suitable immersion into the efficacy of each approach, the student is left with a confusing array of theories and counter-theories.

Tax policy provides a good example for this concern.  Tax policies differ greatly depending on the policy objective.  Income tax strategies for supply-side economics favor capital accumulation.  On the supply-side, reducing inefficiencies and distortions in the market are of paramount concern.  Ensuring business has a ready supply of investment capital is an objective.  For supply-side economics, the market is king, and a low tax rate for business interests is critically important.  Income tax strategies for demand-side economics, on the other hand, favor consumption as the catalyst to economic growth and prosperity.  On the demand side, the consumer is king.  Ensuring consumers have adequate discretionary income is necessary.  Aggregate demand for products and services drives the economy, and governmental infusion of money into the marketplace when growth lags is essential.  For the demand-side approach, a sufficiently progressive tax code is a key component.

Given these conflicting approaches to public policy, teaching them in one course does a disservice to the student.  The result of each strategy will be unique and must be developed in total.  Without a deep dive into these outcomes, the student is left with a bewildering array of counter-factual theories.  Instructors need to flush this out by examining competing theories in an untainted atmosphere of hard data.  This can only be done by examining the finer points of each strategy in a stand-alone, end-to-end analysis of these two distinct approaches to economic growth and sustainability.

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